A mortgage is a loan procured by a buyer to pay off the seller of a piece of property in full. The buyer then owes the lender the total amount borrowed, plus interest and fees. As collateral or guarantee of payment, the lender holds the deed or ownership of said property, until the buyer pays the mortgage off. However, the buyer occupies the property as if it were already his or her own.
There are several types of mortgage loans available, and which is best for a particular buyer depends on his or her financial situation and long term plans. Some people plan to stay in a house for 30 years; others make short-term investments to move up the real-estate ladder. Matching the right client with the right loan requires time and energy on the part of buyer and lender both.
A few of the common terms associated with mortgage loans are closing fees, points, and the annual percentage rate (APR). These and many other fees can be negotiated. The best-looking mortgage advertisement isn’t always the cheapest due to possible hidden fees. Experts say comparing the APR of a loan can help the buyer determine which is less expensive, as law requires that all fees be included in this calculation. Often the APR is not advertised and the buyer must ask for this information.
If a buyer can put down 20% of the buying price in cash, interest rates will be lower and the buyer will not have to get Private Mortgage Insurance (PMI). PMI is required for buyers with little or no equity, as PMI will make payments in the event the buyer cannot. Lenders require PMI to protect their investment when a buyer puts less than 20% down, because the mortgage, with fees and interest, will initially be greater than the worth of the property. This changes when the loan has been paid down over a period of time, building up approximately 20% equity, at which point PMI (and its fees) terminates.
After PMI expires, if the holder of a mortgage misses payments, the lender can foreclose on the loan. This means the buyer has defaulted on his contract, and the lender can evict the buyer and sell the property to recoup losses. The buyer loses everything in this scenario. When this occurs, it usually happens early on. Once people build up equity in property they are more motivated to save the investment and have more options.
If a mortgage holder who has built up substantial equity is suddenly strapped for cash, he or she might consider refinancing. By refinancing the loan over a longer period of time, the monthly payment can decrease. Some people refinance to draw equity out of the home in the form of a cash payment, often used to make improvements on the home.
A general rule of thumb is that a mortgage payment should not exceed 28% of the total income of the qualifier(s). Qualifying will require an acceptable debt-to-income ratio. Credit cards, car loans and any other financial debts figure into this calculation. It is a good idea to see how much you qualify for before shopping for a home.
Mortgage loans can be fixed-rate or variable, short term or long term. The right loan will depend on many factors. Be sure to get professional advice, educate yourself thoroughly on your options, and shop around before deciding on the best plan and lender.